"King Charles [II] took from your father the plate, specie, and bullion
that had been entrusted to the House of Ham by its depositors. The House
was ruined. Your father died of shame. Others in the goldsmith trade had
suffered likewisethough not as muchand understood that your father
had been given no choice. The King had taken the gold by invoking his divine
right to it. That's why you've never wanted for a position in the banking
tradebecause the story is proverbial among money-goldsmiths and you are
a living link to it.... He saw that banks would never work right if the King
could sack their vaults whenever he ran low on revenue. This was a revolutionary
thought."
Neal Stephenson, The System of the World"The Baroque Cycle" trilogy, p. 800, 2004.

It was a long time ago in a Europe which survives mostly in dusty
history books, a few novels of the era, and the occasional historical
novel about that period. So, what could we possibly learn from AD 1722
that would be applicable today?

In many ways, it was a time much like our own. The size of the world
had greatly expanded a few hundred years earlier with the discovery of
what proved to be two new large continents in the Western Hemisphere.
Technologies like the steam engine were being developed to advance
rapidly the industrial revolution. Political thought had been advanced
by minds like John Locke and science by minds like Isaac Newton.
Mercantilism was still a favorite economic policy, and wars were a big
enterprise for making money. Politics was easily as corrupt as it is
today.

Most of the things we think of as contemporary in the field of
economics, such as double entry bookkeeping, finance, insurance,
syndication, banking, fiat money, joint stock companies, and political
intrigue had been thoroughly advanced. So, the comparison to 1722 is
not like a comparison to AD 1453 and the sack of Constantinople or AD
476 and the fall of the Western Roman Empire.

Those earlier cases are fascinating, to be sure. Rome's coinage,
though badly debased by numerous emperors, was widely used in trade
and commerce across the world. The same is true of the Islamic dinar
and the Byzantine solidus, both of which were no longer issued after
the Mongols and Turks swept through. The collapse of a global reserve
currency is potentially in the cards, so these other events are of
interest. I'll examine them in a future essay.

Presently, though, let's look at 1722. Americans talk about "The Great
Depression" and refer to the events from 1929 to 1938. But this period
was a relatively brief contraction which, had it met with government
inaction, would likely have been even shorter. A truly great
depression followed the collapse of the South Sea Bubble in 1722. By
some estimates, about 90% of the value of all stocks listed in London,
Paris, and Amsterdam in 1720 had been wiped out by the end of 1722.
Around 95% of the companies that had existed in 1720 had been wiped
out by 1730. (Mackay, Charles,
Memoirs of Extraordinary Popular Delusions, 1852).

Not only was the global depression deep, it was long. Stocks did not
recover to their previous price levels until 1782. Many events we
regard as significant, such as the American Revolutionary War, took
place in the context of this global depression. If prosperous people
do not typically rebel or revolt, it is interesting that some of the
most dramatic revolutions took place amidst the poverty of one of the
worst depressions in world history.

Where shall we begin this story? We know that by 1649 the English
civil war had been won by the parliamentarian forces. Charles I had
been executed. Cromwell took control and led England on a series of
expeditions to ransack places like Ireland.

The story continues with a thoroughly corrupt king named Charles II
who was brought to England to take up where Cromwell's son left off.
The restoration of the monarchy was accompanied with considerable
fanfare, but much of the power of government had already been absorbed
by Parliament. Charles II was quite capable of spending all the money
in the kingdom. He held lavish feasts, he had numerous mistresses many
of whom he created duchessesand he was an enthusiastic
alchemist, among his other vices.

Then, we're told by a knight: "The King having borrowed the greatest
part of the ready coin of the nation [from] the goldsmiths, shut up
the Exchequer, which caused the most considerable of them to break,
and an infinite of people whose money those [goldsmiths] had borrowed
at interest to be undone." Memoirs of Sir John Reresby for 1672.

The closing of the Exchequer was originally for one year, but was
extended to several years, and then indefinitely. The "infinite of
people" by some estimates (Fekete, Antal E., 2002, "Gold Eagle
University") was as many as 10,000 depositors.

A typical case would be Alderman Edward Blackwell who is frequently
mentioned by Samuel Pepys in his Diary.
Blackwell was a goldsmith and "banker" or money goldsmith. He was
ruined by the closing of the Exchequer by Charles II in 1672. The
crown then owed him £295,994, sixteen shilling, sixpence. In lieu of
paying such a debt, the King granted him an annuity of £17,759,
thirteen shilling, eight pence. Blackwell retired to Holland and died
there in 1679. The annuity had paid little more than a third of the
debt by the time of his death. Some of the bankruptcies were
immediate, others were to suffer well into the 1680s, trying to get
their claims paid.

And in what peculiar form those claims were found! Not papers, as you
might imagine, sealed with great wax hunks and the imprint of the
king's seal. No, rather bundles of twigs or sticks represented the
debts. These were the all-important tally sticks.

The basic idea was nothing new. Some of the oldest artifacts known are
lengths of bone on which marks have been made. Some archaeologists
suggest that the bone was chosen from a specific animal and the marks
represented the herd of that animal being tracked or accounted for.
These early artifacts would then seem to indicate a natural or genetic
predisposition to counting, property ownership, and the accumulation
of capital.

Aurignacian period artifacts show tally marks on bones from about
30,000 years ago. Roughly at the time Cro-Magnon man appears in
Europe, he is marking bones with notches. A Czech discovery of 1937
was a bone from 20,000 or more years ago with fifty-five notches in
groups of five, using the tally system as we are familiar with it:
four vertical notches connected by one diagonal. Also of interest is a
bone
from about 25,000 years ago which bears notches representing
prime numbers 11, 13, 17, and 19. This last item suggests the
existence of a significant civilization presumably now lost as melting
ice raised the sea level and inundated the old coast line. (Even today
most of mankind lives within a few tens of miles from the sea.)

The tally stick itself is a simple device. It makes use of the fact
that when a stick is split lengthwise, the grain of the wood creates a
unique pattern. The two pieces of wood can only be matched to each
other. So, information which is inscribed across the place where the
break will be made should be carried on both halves.

The use of tally sticks derives from an earlier tradition of making
contracts. The Vikings seem to have been first on the scene with this
idea. The contract would be written down in Nordic runes on a stick.
The stick would be split lengthwise. The fulfillment of the contract
would be accompanied by matching the two pieces of wood to review the
terms. Neither party could change the terms, since the markings
wouldn't match up. Nor could one party create wholly new terms on
another piece of wood, because the corresponding half would not be in
the possession of the other party.

This tradition from the Vikings was brought to England with the Norman
invasion. William the Conqueror probably didn't have time for it, but
his son Henry seems to have done. England was divided into shires and
each shire was the responsibility of a sheriff. Taxes were assessed
for each shire. The accounting of the tax assessment was cut into a
stick in a series of notches. The stick was then split, so both
sheriff and king would have a record. The sheriff would then go and
pummel the locals until he had farmed up as much taxes as he wanted,
killing any peasants who resisted and generally seizing anything of
value. When it was time to pay the king his share, the sheriff would
appear with the loot and his tally stick. The sticks would be
compared, the tally known, and the loot would change hands.

The system evolved, as systems do. Taxes were collected twice a year,
at Easter and at Michaelmas. The amount of taxes to be paid at
Michaelmas would be recorded on the tally stick system. By the time of
Henry II, a further evolution was widespread. Since tally sticks were
representations of taxes due to the king, the king would sell his half
of the sticks at a small discount. The buyer would then receive the
tax payments when they came due.

The system was vaguely reminiscent of government bonds. Since the
tally stick represented value due to the king, or to the buyer of the
king's half of the tally stick, it was possible to transfer value by
moving the king's half of the stick rather than commodities or specie.
According to some sources (Davies, Glyn, 1995,
A History of Money;
1911 Encyclopedia Brittanica) the Exchequer facilitated the smooth
operation of this market. In fact, the officers of the Exchequer
included a tallier or "teller" whose role was to count up the tallies
or tally up the funds. Bank tellers perform a comparable function
today.
[see link]

Since the tally sticks came to represent taxes due, the king could
borrow funds and pay out in tally sticks. Later, the tally sticks were
acceptable for taxes. Some of these tally sticks represented
considerable value owed by the king.

Naturally, the rapacious tendencies of the kings would shine through.
They would borrow as much as they could. Then they would borrow more.

It was this borrowing that eventually brought down Charles II and the
Stuart dynasty. Stephenson portrays the events as though a
confiscation took place. More likely, what happened was the goldsmiths
accepted tally sticks as representations of the king's obligations,
then presented them for payment and were rebuked with the closing of
the Exchequer. So, rather than finding an empty vault, as portrayed in
Quicksilver,
the auditors of the Ham goldsmith vault probably would
have found a bunch of hazel twigs split lengthwise and marked with
tallies. Whether Neal wrote such a scene and it was edited for length,
we don't know.

Owing to the excessive borrowing of the monarchy, the market for tally
stick moneythe demand for money in this form if you wouldwas
severely reduced. Adam Smith in his
Wealth of Nations book ii, chapter
xi says, "in 1696 tallies had been at forty, and fifty and sixty per
cent. discount and bank notes at twenty per cent." Of course, by that
time, the Glorious Revolution had overthrown James II, placing William
and Mary on the throne. Also by then, the Bank of England had been
founded in 1694. One tally stick worth £25,000 was paid in by an
original stockholder. In other words, these shares were bought in one
of the most powerful business enterprises in the history of the world
with a split piece of wood.

The discounting of the value of the tallies was not the last of the
assaults. Though tallies were used until 1826, they were out of favor
very quickly. The mint began to produce sound coinage, the Bank of
England preferred its own bank notes, and tally sticks were outmoded.
Parliament eventually ordered that the tallies of official government
transactions be stored away, not daring to expose these records of
events nor wishing to pay out claims against them. So in 1826, the
tallies went into storage.

The tally men had their revenge, though. On the night of 16 October
1834 the tallies were finally committed to the flames. By some
accounts in furnaces whose flues overheated. By other accounts in an
enormous courtyard bonfire. In any event, the old Houses of Parliament
were consumed in the flames when the fire got out of control. The
horrid Gothic revival pile we see today is the replacement for the old
Houses of Parliament, burnt to the ground along with the tally system.

By 1720, the money of England was on a gold standard. That development
was due to Sir Isaac Newton, who served as master of the mint. He also
invested in the South Sea company, getting out before the collapse
only to have misgivings and get back in for a thorough pummeling when
the bubble burst. So, his cleverness in things financial was hit or
miss. Yet, that gold standard was to last two hundred years, and
served Britain in good stead during that time.

Tally sticks proved to be another worthless fiat money scheme. They
were only valuable so long as they represented tax payments or value
owed by the crown. Ultimately, they were repudiated and consigned to
the flames, like ever so many other fiat money samples. They were
inflated or discounted depending on the arbitrary spending habits of
capricious monarchs.

Tally sticks show that anything may be used as a money substitute. Woe
betide those who accept money substitutes and lend out the real thing
in exchange. When the substitute goes sour, who would be left holding
the true article? Better to have gold and silver coins in your
possession than rely upon any substitute.

The BBC informs us of the consequences of the fiat money scheme.
"Aiming, like many previous monarchs, to regularise the monarchy's
finances, in 1694 William III licensed the founding of the Bank of
England. Its chief debtor was the government, which it made an
indefinite loan of £14,000,000. Successive governments were
preoccupied with servicing and ultimately reducing the National Debt,
which nevertheless grew progressively; by 1763 it stood at
£130,000,000."

The BBC continues, "The South Sea Company was set up in 1711 to manage
English trade with South America, the Spanish slave trade included;
its Tory backers saw it as a counterweight to the Whig Bank of
England. In 1719 the company proposed to manage part of the National
Debt, offering investors and the government better terms than the Bank
of England. While the scheme might ultimately have worked, its launchusing
exaggerated claims, cut-price stock offers and outright
briberymade a rapid payback imperative; funds were raised through
further stock issues, supported by ever more inflated expectations.
The company collapsed in 1720, ruining many investors. The Bubble Act
of 1721 forbade the founding of joint-stock companies without a royal
chartera provision which slowed the development of British
industry."
[see this link]

The lessons are many and varied and worthy of consideration today.
First, the bubble was not just a British event, nor merely the fiat
money excesses of the Bank of England alone. France had a part in it
with the fiat money of the Banque Royale. Many companies were bid up
in the bubble, which proved to be founded on nothing but a house of
cards.

The government response very likely worsened and deepened the
resulting depression, so that things were worse for longer.
Innovations to overcome the difficulties were often thwarted,
deliberately, in an effort to restore a status quo of the vested
interests.

The peak values for stocks in 1720 were the end of a long series of
bubbles. Newton had sold out prior to the end, but bought back in to
lose nearly everything. Once the collapse came, there was no way to
restore things to their former heights.

What would the stock market look like in October 2009 if the peak in
October 2007 was met by the same kind of 90% haircut we saw between
1720 and 1722?

The high price of the Dow Jones Industrials was 14,279.96 during the
day of 11 October 2007. So, if things were now as bad as they were in
1722, we would expect to see the Dow at 1,428. We would have to go
back to November 1985 to find the Dow at that levelmeaning that we
could conclude that the last 24 years were just an enormous bubble.
(We've already seen prices wiped back to 1997, so the last 12 years
has definitely been a bubble.)

The peak for the NASDAQ was 2,835.63 on 1 November 2007. Again, given
a 90% haircut, we would expect to see, two years later, 284 on the
NASDAQ. That would take us back to October 1985.

For the S&P 500, a broader market indicator than the Dow, the peak was
1,576.09 on 11 October 2007. So if the economic calamity is a 1722
type event, one would anticipate a value of 158 on the S&P 500. Such a
collapse would take us back to August 1984.

While there are certain similarities in economics, science, politics,
and ethics, between today and 1722, there are also many differences.
The world has been without any gold standard currency since earlier
this decade when Switzerland's currency finally divorced itself from
gold. The world reserve currency, the dollar, has been unrelated to
gold since 1971. Whereas the English currency in 1722 and most other
world currencies were convertible to gold or silver, or largely coined
therein.

So, while an historical antecedent worse than the 1722 collapse is not
known, there's really no reason to believe that the current economic
calamity is only as bad as 1722. It could be much worse.